Why the Apr-Sep fiscal deficit figure is also a fudge

Miraculously, the fiscal deficit figure for September was practically nil. But did the FM provide for Rs 70,000 crore of oil subsidies due to the OMCs?

hidden November 01, 2012 13:12:49 IST
Why the Apr-Sep fiscal deficit figure is also a fudge

By R Jagannathan

September, the month following the one in which Palaniappan Chidambaram took over as finance minister for the second time under UPA, reported a miracle of sorts. Unusually for the year, the fiscal deficit for the six-month period (April-September) is lower than for the five-month period (April-August).

In short, there was no fiscal deficit at all in September.

According to figures released yesterday, the fiscal deficit - which is the gap between government expenditures and revenues that have to be bridged through borrowing - fell to 65.6 percent of the budget estimate of Rs 513,590 crore compared to 65.7 percent the previous month.

In absolute terms, reports Business Standard, the fiscal deficit figure was Rs 3.36 lakh crore for the six-month period ended September compared to Rs 3.37 lakh crore as at the end of August 2012.

Why the AprSep fiscal deficit figure is also a fudge

Chidambaram has raised the fiscal deficit target to 5.3 percent, but even this target won't be easy to achieve, given the understated figures on subsidies. AP

If this kind of miracle keeps happening in the months ahead, one wonders why Chidambaram needs to raise his overall fiscal deficit target from 5.1 percent of GDP to 5.3 percent, which is the figure he gave while unveiling a five-year fiscal consolidation roadmap on 29 October.

Oh, well, the figures are probably fudged by holding back overdue subsidy payments.

The finance ministry has simply not paid the oil marketing companies (OMCs) over Rs 70,000 of subsidies due to them for the first half of the year.

The OMCs reported under-recoveries of Rs 85,586 crore during the April-September period, and unless Chidambaram pays them his share of Rs 70,000 crore over the next week, on 9 November, Indian Oil, Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) will report their biggest-ever losses in history.

In the first quarter, Indian Oil reported a net loss of Rs 22,450 crore, HP Rs 9.248 crore, and BPCL Rs 8,837 crore. According to a report in BusinessLine, the centre usually sends its subsidy payments in time for the quarterly results, but after missing the first quarter, there is no indication that it will do so even in the second quarter.

In the first quarter, the losses wiped out half the OMCs' net worth. This time two of them - HPCL and BPCL - will see their net worths completely wiped out, while Indian Oil could barely stay in positive territory.

The government used most of the outlays for oil subsidies - over Rs 43,500 crore - to pay for last year's subsidies. So how are the oil companies continuing to deliver fuel to homes and pumps?

The answer is borrowing. In November, Indian Oil alone could see its borrowing rise above Rs 1,00,000 crore if the subsidies are not paid.

The oil companies are staying in business primarily because banks are still lending to them, and because some subsidies are still coming to them directly from the oil and gas exploration companies - ONGC, Oil India and Gas Authority of India Ltd.

The trio pitched in with Rs 14,000 crore of subsidies in the first quarter, and could do the same for the September quarter too, but even after this the OMCs will be up against a Rs 70,000 crore loss.

The OMCs are losing Rs 433 crore a day on diesel, LPG and kerosene subsidies even after the recent changes.

Even though global prices for the Indian basket of crudes have fallen from around $110 in the first fortnight of October to around $107 at October-end, the rupee's depreciation from Rs 52.50 to Rs 54 has ensured that the rupee price of fuels has risen rather than fallen.

The finance minister and the new oil minister, Veerappa Moily, have to cough up the money in the next week or else the OMCs will have wiped out most of their net worth. If they were not government companies, they would be considered bankrupt.

As for the fiscal deficit, the less said the better. The April-September figure of Rs 3,36,000 crore is understated by at least Rs 70,000 crore - the money owed to the OMCs.

At a more realistic Rs 4,06,000 crore, this figure is nearly 79 percent of the original fiscal deficit figure put in by Pranab-da. Chidambaram has raised the fiscal deficit target to 5.3 percent, but even this target won't be easy to achieve, given the understated figures on subsidies.

One hopes the finance minister has not lost his fiscal roadmap already.

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